Why Facebook-Microsoft Patent News Isn't a 'Disaster' for Yahoo!

Yahoo! stock went up immediately after the Facebook-Microsoft news was released.

Eric Jackson

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (TheStreet) --
Earlier Monday, Microsoft(:MSFT) announced that it would basically split the patents it had recently bought from AOL(:AOL) with Facebook. Facebook will pay roughly half the costs to get their hands on them.

Immediately, the pundit-sphere started cackling that Yahoo!(:YHOO) was about to have its head handed to it by Facebook because of this news.

Business Insider squealed that this news was a "disaster" for Yahoo! and Scott Thompson's plan to sue the social networking giant.

Yet a funny thing happened in the minute-to-minute trading of Yahoo! stock immediately after the Facebook-Microsoft news was released: it went up. It didn't go up by a lot and the stock was already down more than 1.5% on a bad tape, but the stock still went up.

What does the accord between Facebook and Microsoft mean for Yahoo!? The honest answer is no one knows and it could mean nothing.

Even if Yahoo! hadn't sued Facebook over the patents, the reality is that Facebook was woefully low on filed and granted patents. It was actually pretty reckless that it had so few patents. And being founded in 2004 is no excuse. Any start-up needs to be thinking of building its IP portfolio from day one.

All the Yahoo! suit did was wake Facebook up from its Gen Y "I'll live forever and never get sick so I don't need life or health insurance" mentality. Now, weeks away from its IPO, Facebook has got IPO religion. First, it bought a slug of IBM's patents (at an undisclosed price) and now $650 million for its share of the AOL patents.

All of these moves could have nothing to do with the current Yahoo! suit. It's especially hard for outsiders to know as lay patent people and not knowing specifically what they bought and how those patents relate to Yahoo!'s current claims.

I say "current claims" deliberately because I'm sure that Facebook and Yahoo! are also talking about potential future claims Yahoo! could bring against Facebook.

Like what? Well, search for starters.

Facebook needs lots of revenue and profits to grow into the possible $140 billion valuation it might get post-IPO. It only had $3.7 billion in revenues last year, so such a valuation would be an eye-popping 37.8x trailing price-to-sales ratio. It gets hard to breathe at that kind of altitude.

If Facebook gets into search, it could conceivably see that as a very important new revenue stream and one that would put Google(:GOOG) on the defensive. Facebook would be able to leverage all of its social graph data on particular users to yield more differentiated search results compared to Google results.

If Facebook does proceed with search, it will want to make money selling ads against its results. When it does, Yahoo! will be in a great position to sue it through ownership of the Overture/GoTo.com patent which it used to sue Google successfully in 2004.

As patent lawyers like to say, that particular patent has been battle-tested. Google tried not to pay and -- after many legal attempts -- settled with Yahoo! Facebook would seem to be destined to the same fate.

Yet, Yahoo! hasn't sued Facebook yet for it. Why not? What would the damages be? Effectively zero, as Facebook currently isn't in that business. So, Yahoo! chose 10 patents where it feels there is a violation and where Facebook is making money today. But, the settlement talks are surely discussing what future claims Yahoo! might bring against Facebook.

Although I was the first person to flag the potential of Yahoo! to go after Facebook last fall, I'm not married to the means by which Thompson is going after Facebook. I'm all in favor of a settlement which is good to Yahoo! holders. Clearly, both sides have something to gain from a settlement. Yahoo! brings its monthly traffic, its ability to be a strong search partner, and its patent portfolio which could well insulate Facebook from future attacks.

We'll see what happens. All this huffing and puffing by the blogosphere -- and the posturing by "those close to the situation" at both Yahoo! and Facebook -- probably means absolutely nothing to what the outcome will be.